Vanguard Group founder Jack Bogle recently wrote an opinion piece in the Financial Times on the dominance of exchange-traded funds. Bogle wrote that ETFs have revolutionized stock market trading and that ETFs along with traditional index funds have revolutionized investing in mutual funds. He observed that ETFs account for nearly one-half of all trading in U.S. stocks and that the implications of this rapid trading have yet to be fully examined. Bogle told the Financial Times: “It is high time both the ETF industry and policymakers re-examine the entire ETF ecosystem. Why? Because of its sheer size and fragility in times of market stress.”

Additionally, in a recent comment letter to the SEC on its derivatives rule proposal, technology-enabled market maker and liquidity provider Virtu Financial LLC urged the SEC to study the operational risk factors associated with ETFs and to push for a robust transaction processing infrastructure. The comment letter described the uncertainty and risk in the trading infrastructure for ETFs, noting that many interactions for creations and redemptions are still conducted via email and in some cases via the phone. Virtu wrote that the transaction processing infrastructure for creation/redemption processes is “not straight-through and is susceptible to human error.” Virtu proposed an automated interface that “will minimize the chance of human error and enhance the [authorized participant’s] ability to manage risk at a very crucial period of the trading day” and added that infrastructure improvements would translate to narrower spreads and lower costs. Market makers like Virtu earn the spread between the bid and offer prices on ETFs and on the difference between the price of the ETF and its underlying components.